An argument that has been doing the rounds is that even though the National Energy Guarantee (NEG) is not the first best solution (or probably not even the sixth best) it gets past the Coalition’s Back Bench and so we must work from there.

This is a sort utilitarian, lowest common factor argument whose underlying premise is that something is better than nothing. But is it?

In brief, the NEG’s proposes to impose on retailers an emission intensity and a dispatchibility obligation. The emission intensity obligation is clear and will be set, apparently, at a level to match the Commonwealth Government’s policy.

The dispatchibility obligation is another beast altogether. It is not hard to see why the ESB has not been able to define it. In an interconnected power system, generators impose external costs (‘externalities”) by virtue of their failure risk.

Specifically, in a power system with large thermal generating units, power system operators need to procure synchronised “spinning reserves” to keep the power system stable if one of those large generating units trips.

In most power systems including the NEM, it is such generator unplanned outages, not demand changes, that are typically the largest source of instantaneous system perturbation.

At the moment, the vast bulk of such “spinning reserve” is obtained from Automatic Generator Control (AGC) on coal thermal units, which allow them to quickly increase or decrease production within fairly narrow bounds: spilling steam to decrease and sending it to the turbines to increase.

Sometimes system operators also “part-load” plant (ensure they have a head of steam but spill much of that steam) in order to ensure that sufficient fast reacting generation is available should it be needed to quickly pick up production.

In the NEM, some of this reserve and fast response is provided through ancillary markets, and AEMO recovers the cost from retailers.

The cost of this “externality” is not huge. In Australia and in electricity markets around the world, the power system operator typically bears the cost and then recovers it from retailers.

Twenty years ago, in an assignment for the British electricity regulator, I worked on an incentive scheme for the National Grid Company in England to reduce the costs of this externality which at that time was not more than about 0.2% of the value of wholesale electricity.

I suspect the cost would be much the same here, although as we know the exercise of market power in ancillary markets means consumers often pay far more than they should.

In an increasingly renewable electrical system it might be argued that the intermittency of renewables provides an additional source of externality – other generation needs to be found when the wind and sun are not available.

But it is debatable whether the adjustments arising from intermittency should be considered an externality. It is plausible to argue that as technologies change so markets must change and we can not just stick with historic constructs borne of increasingly defunct technologies.

Even if we accepted the proposition that intermittency gives rise to externalities, it is far from clear that these externalities will be large – it depends on many factors most particularly the continued rapid reductions in lithium battery costs.

At any rate Dr Finkel’s review suggested that renewable generators might also be required to offer firm dispatch capability to the market and that AEMO should have an enhanced role in procuring reserves to keep the system robust to renewables’ intermittency.

The Finkel Review’s proposals were properly researched and its recommendations are mainstream – the combinations of supply-side obligations and more often, system operator reserve procurement – is the norm in other countries as well.

The NEG, by contrast, proposes the radical idea that the obligation to procure “dispatchibility” should be imposed on retailers not on generators or the system operator.

This will introduce massive complexity, not least because trying to define “dispatchibility” and then enforce it will make the search for the holy grail look like a walk in the park.

More generally, the NEG joins a number of other arrangements in the NEM that are unique or very unusual. These include:

The bifurcation of the design and implementation of regulation (this is unique internationally);

The regulation of government-owned network service providers as if they are privately financed (this is also unique internationally);

An energy-only electricity market (this is very rare internationally);

No administrative arrangements for demand-response (this is also rare internationally);

The most volatile electricity market in the world with the highest Market Price Limit;

Extraordinarily high levels of market concentration in retail and wholesale markets.

These features – most of which the Australian Energy Markets Commission staunchly defends – account for a large part of the reason why electricity prices in Australia have moved from amongst the lowest in the world when electricity was provided by then much-derided state electricity commissions (so what do you think about them now, huh), to now amongst the highest in the world.

The NEG is yet another case of Australian exceptionalism in energy. At first, it struck me as a bizarre idea, detached from a conventional understanding of power system economics or engineering.

The more I look at it the more clearly I see it fits the toxic mix of muddled thinking and ideology that characterises so much of the regulatory oversight of this industry.

But I doubt the Coalition Back Bench liked it for this reason. Presumably they saw in it a way to sustain demand for coal generators – which is indeed exactly what the ESB’s modelling shows to be the case.

As the list of Australian “firsts” in energy markets attests, never under-estimate our polities’ propensity, when all is said and done, to put the customer second.

A number of supply-side lobby groups but also social welfare and environmental organisations have recently pleaded with state governments to just give the NEG a chance. For the supply-side lobby groups this angle is much to be expected, but for the environmental and welfare NGOs not so.

Great note Bruce. This has been the worst example of policy development process I can recall in Australia. It’s based around the aemc’s totally distorted and view of how competition should work with little or no regard for what has actually happened. Overseas experience is ignored. The aemc, because it’s them not the esg that has developed this policy, has prior form on this. The emissions intensity scheme was proposed despite the fact that it had been considered but not adopted overseas.

Meanwhile reverse auctions which could include dispatchable power are being implemented by the States and producing competitive, lowest cost, managed investment in new generation. The answer is right in front of the aemc and esb’s eyes but they refuse to see.

Ken Dyer

What else did you expect from the Liberal stooges appointed to the AEMC, by Tony Abbott when he was PM?

RobertO

Hi All, I have never seen the idea that the NEG is a good. It must be binned as rubbish, doing nothing is far better, I do not want it kept for further discussions or more information as it will kill the idea the RE is cheaper. How will they cortrol households and their move to cheaper energy, put in a Front Door Tax, add a Solar Tax or just simply say “No More Connections for Households”! Household do no choose Solar on roof as “I am saving the Planet”, they choose it because it saves money and I might be helping the planet!

hugh grant

Great summary Bruce. I am also astounded that some consumer advocacy groups also appear to be supportive of the NEG on the basis that anything might be better than nothing. I suggest that poor and ill informed consumer advocacy is another key deficiency in our unique NEM arrangements.

Julie Mulhauser

The welfare and environmental NGOs might be forgiven for being a bit confused on energy policy and what is the best way forward!

I was interested to read the last weekend’s AFR interview with Alan Finkel – in which he expressed his regret that he hadn’t explained the effect the RET had had in putting downward pressure on wholesale prices.

So Bruce – pretending for a moment that the coalition backbench doesn’t exist- what energy policy would you like to see post 2020?

bruce mountain

A combination of a transparent price on emissions – such as a tax and government auctions for renewables and storage. This is now the dominant model internationally.

But a precursor to this, we need regulatory institutions that can be trusted to provide frank and fearless advice based on a proper understanding of power system economics and engineering.

Robin_Harrison

The fossil fools did us a favour. Their greed meant RE cost parity happened early here and it’s now on the verge of economically galloping away.
The behaviour of the political puppets is far less important than where the smart money is going. Currently it seems to be heading for the guaranteed growth potential of this energy transition.
Hold on to your hats. The fossil fools are about to discover the meaning of exponential growth.

Kevan Daly

“This will introduce massive complexity, not least because trying to
define “dispatchibility” and then enforce it will make the search for
the holy grail look like a walk in the park.”

The recent Helm Review in the UK struggled with this issue without much success.

bruce mountain

Really? I thought Helm’s suggestions were quite sensible. The issues here are pretty straightforward and they are certainly not new. Allocate risk to the party best able to manage it – i.,e. system operator.

DogzOwn

How about Trust Julie claiming the COALition is united behind Malcolm, knives drawn of course.

Thanks Bruce for explaining just how far NEG is more of a fantasy than Alice in Wonderland, not even care, even less responsibility, no understanding at all.

benny black

making national policy to appease religious right wing extremists so you can stay in power is never going to be the best option for the planet or the country or consumers….we need to remove this poor ideological driven government quickly and get the nation back on track to reducing emissions and creating new smart jobs.

Graeme Harrison

I believe the other element of the NEG that appeals to (only) the LNP RWNJs is that it disincentivises the use of renewables beyond a very low threshold. With a Clean Energy Target (CET) as recommended by Finkel, the positive push for renewables does not turn negative at any point. A CET will just enforce getting renewables to a given percentage. Because Australia needs to achieve 28% overall CO2 emissions reduction by 2030, the NEG stops helping renewables at this level. But we have achieved almost no gains yet in fixed energy or transportation, so the ‘heavy lifting’ must be achieved via the electricity sector, where renewables are viable. So Australia needs 2.5-3 times the 28% achievement in the electricity sector, to take into account that electric vehicles will take longer!

We need a CET, not the opposite of one (a NEG). The only positive thing that the LNP have achieved is that, by terminating the carbon pricing of Gillard, they allowed cost of electricity to consumers to rise to levels that no-one would have ever allowed under any form of carbon pricing. OK, so the ‘surplus’ went to those who got the privatised assets and not to other carbon-reduction schemes, but inadvertently, by raising electricity prices by so much, consumers learnt to use less!!! This should be seen as more like an ‘own goal’ in that it was the opposite of what Tony Abbott wanted to achieve, but was nevertheless a small useful step towards capping our use of CO2.

[Decades ago, I presented a paper on electricity demand and grid management at the Institution of Engineers Australia’s National Engineering Conference.]

bruce mountain

thanks Graeme. Would you perhaps have an electronic copy of that paper that you could send to me?

I went on to be on the team of five that developed the first electronic spreadsheet (‘Visicalc’) at Harvard Business School in 1978-9, which got Apple’s ][ computer established. Jobs said in a 1990s TV interview still on YouTube that there were two reasons for Apple’s early success – the open platform of the Apple ][ and the fact that Apple had distribution rights to the spreadsheet, whereas its competitors did not.

I also went on to be a Touche-Deloitte consultant to the US Dept of Energy on Alternative Energies (what we would not call renewables, but also including geothermal energy, which is technically not a renewable).

I think the photo (at top of article) of PM & Energy Minister has them photographed under an extremely large mural of dinosaur bones. Oh dear! Photographer went to some trouble to retain that iconography in the picture, given how high the mural was.